The headline of a very long story about Goldman Sachs and its CEO, Lloyd Blankfein in the London Times is calculated to provoke: "I'm doing 'God's Work.' Meet Mr. Goldman Sachs."
The passage evokes memory of last week's outburst by banking executives defending the Christian righteousness of profits.
So, it's business as usual, then, regardless of whether it makes most people howl at the moon with rage? Goldman Sachs, this pillar of the free market, breeder of super-citizens, object of envy and awe will go on raking it in, getting richer than God? An impish grin spreads across Blankfein's face. Call him a fat cat who mocks the public. Call him wicked. Call him what you will. He is, he says, just a banker "doing God's work"
But that's hardly the most inflammatory section in John Arlidge's piece. Far more disturbing than the call to a higher authority is Blankfein's dark twist on the old "what's good for General Motors is good for the United States" theme.
Does Blankfein not acknowledge that it is maddening for most of us to watch Goldman gobble up so much cash while we struggle? Quite the opposite. He insists we should be celebrating his bank's success, not condemning it. "Everybody should be, frankly, happy," he says. Can he be serious? Deadly. Goldman's performance, he argues, is the firmest indication of a nascent economic recovery that will benefit not just him and his firm but all of us. "The financial system led us into the crisis and it will lead us out."
... "I've got news for you," he shoots back, eyes narrowing. "If the financial system goes down, our business is going down and, trust me, yours and everyone else's is going down, too."
Let us make as much money as God, in other words, or else.
In September 2008, as the worst of the financial crisis engulfed Wall Street, George W. Bush issued a warning: "This sucker could go down." Around the same time, as Congress hashed out a bailout bill, New Hampshire Sen. Judd Gregg, the leading Republican negotiator of the bill, warned that "if we do not do this, the trauma, the chaos and the disruption to everyday Americans' lives will be overwhelming, and that's a price we can't afford to risk paying."
In less than a year, Wall Street was back. The five largest remaining banks are today larger, their executives and traders richer, their strategies of placing large bets with other people's money no less bold than before the meltdown. The possibility of new regulations emanating from Congress has barely inhibited the Street's exuberance.
But if Wall Street is back on top, the everyday lives of large numbers of Americans continue to be subject to overwhelming trauma, chaos and disruption.
It is commonplace among policymakers to fervently and sincerely believe that Wall Street's financial health is not only a precondition for a prosperous real economy but that when the former thrives, the latter will necessarily follow. Few fictions of modern economic life are more assiduously defended than the central importance of the Street to the well-being of the rest of us, as has been proved in 2009.
Inhabitants of the real economy are dependent on the financial economy to borrow money. But their overwhelming reliance on Wall Street is a relatively recent phenomenon. Back when middle-class Americans earned enough to be able to save more of their incomes, they borrowed from one another, largely through local and regional banks. Small businesses also did.
It's easy to understand economic policymakers being seduced by the great flows of wealth created among Wall Streeters, from whom they invariably seek advice. One of the basic assumptions of capitalism is that anyone paid huge sums of money must be very smart.
But if 2009 has proved anything, it's that the bailout of Wall Street didn't trickle down to Main Street. Mortgage delinquencies continue to rise. Small businesses can't get credit. And people everywhere, it seems, are worried about losing their jobs. Wall Street is the only place where money is flowing and pay is escalating. Top executives and traders on the Street will soon be splitting about $25 billion in bonuses (despite Goldman Sachs' decision, made with an eye toward public relations, to defer bonuses for its 30 top players).
The real locus of the problem was never the financial economy to begin with, and the bailout of Wall Street was a sideshow. The real problem was on Main Street, in the real economy. Before the crash, much of America had fallen deeply into unsustainable debt because it had no other way to maintain its standard of living. That's because for so many years almost all the gains of economic growth had been going to a relatively small number of people at the top.
President Obama and his economic team have been telling Americans we'll have to save more in future years, spend less and borrow less from the rest of the world, especially from China. This is necessary and inevitable, they say, in order to "rebalance" global financial flows. China has saved too much and consumed too little, while we have done the reverse.
In truth, most Americans did not spend too much in recent years, relative to the increasing size of the overall American economy. They spent too much only in relation to their declining portion of its gains. Had their portion kept up -- had the people at the top of corporate America, Wall Street banks and hedge funds not taken a disproportionate share -- most Americans would not have felt the necessity to borrow so much.
The year 2009 will be remembered as the year when Main Street got hit hard. Don't expect 2010 to be much better -- that is, if you live in the real economy. The administration is telling Americans that jobs will return next year, and we'll be in a recovery. I hope they're right. But I doubt it. Too many Americans have lost their jobs, incomes, homes and savings. That means most of us won't have the purchasing power to buy nearly all the goods and services the economy is capable of producing. And without enough demand, the economy can't get out of the doldrums.
As long as income and wealth keep concentrating at the top, and the great divide between America's have-mores and have-lesses continues to widen, the Great Recession won't end -- at least not in the real economy.
At The Big Picture, Tim Iacano provides an eye-popping chart detailing the stock holdings of Goldman Sach's top executives. The important thing to note is that the numbers reflect what the executives already own right now irrespective of whether they get their 2009 bonuses paid in cash this year, or doled out to them as "restricted" stock that they won't be able to sell for as long as five years.
Lloyd Blankfein, CEO and Chairman of the Board, owns 1,685,932 shares of Goldman, worth $274,393,733.
Gregory Palm, Executive VP, owns 939,742 shares, worth $152,943,011.
John Weinberg, Vice Chairman, owns 910,324 shares, worth $148,155,231.
David Viniar, Chief Financial Officers, owns 794,902, worth $129,370,301.
J. Michael Evans, Vice Chairman, owns 644,953, worth $104,966,101.
And so on.
Now we know why Blankfein was so miffed at Obama's "fat cats" comment that he couldn't manage to physically attend the Monday morning pow-wow in Washington. He's not a fat cat. He's a Godzilla-sized Sabertooth Tiger Monster. Get it straight, Mr. President.
Washington's favorite term these days is "moral hazard." Though this buzzphrase may seem like a complex and even intimidating idea, most of us, whether consciously or not, understand the principle because it's basic common sense.
Applaud your kid -- rather than grounding him -- for punching another kid, and you've created a moral hazard that means he'll probably punch other kids in the future. Give your dog a treat -- rather than a scolding -- after he urinates in the house, and the moral hazard you've engineered makes it likely you'll soon be cleaning up even more sallow stains on your rug. In short, without consequences -- or worse, with rewards -- for wrongdoing, there is an incentive to do wrong. That's moral hazard.
To date, the national discussion about this concept has revolved specifically around financial moral hazard. And, as evidenced by trillions of dollars in public loans, guarantees and subsidies given to speculators to cover their massive losses, leaders in both political parties have no interest in preventing financial moral hazard -- despite stern press releases insisting the contrary. By rewarding rather than punishing Wall Street for losing irresponsibly risky bets and by holding out the promise of similar bailout rewards in the future, politicians have incentivized even more irresponsible risk-taking for years to come.
But financial moral hazard is only half the story. The other half is political moral hazard -- the mother of all other moral hazards.
Consider, for instance, Federal Reserve chairman Ben Bernanke. He's the top regulator who not only sowed financial moral hazard with the Fed's post-meltdown bailouts but openly admits that as the crisis developed, his Federal Reserve "should have done more -- we should have required more capital, more liquidity. We should have required tougher risk-management controls."
Firing Bernanke would tell other regulators that there are consequences for negligence. Instead, President Obama rewarded Bernanke with renomination and thus manufactured a pernicious problem. As economist Dean Baker says, just as bailouts create a financial moral hazard giving speculators no incentive to avoid excessive risk, so Bernanke's renomination creates a political moral hazard whereby regulators "will not have an incentive to do their jobs properly [because] there are no consequences" for failure.
The Democratic Congress, of course, could reject Bernanke's nomination for being "the definition of moral hazard," as Sen. Jim Bunning, R-Ky., correctly noted. But that seems unlikely, considering how many Democrats have been aggressively embracing moral hazard.
When Senate Democrats ratified Obama's nomination of New York Fed chief Tim Geithner as Treasury secretary, they rewarded yet another shill who also fell down on the regulatory job. When those same Senate Democrats considered the nomination of Gary Gensler to head the agency regulating derivatives, they could have rejected him for championing derivatives deregulation as a Clinton official and then cashing in as a Goldman Sachs executive. Instead, Democrats backed his nomination and effectively told every other Gary Gensler-like parasite that misguided actions and corruption don't prevent future promotion.
And let's be fair -- it's not just Democratic politicians who are creating political moral hazard. Many Democratic pundits, activists and voters continued cheering on President Obama while he stuffed his administration full of Wall Streeters -- and many of these rank-and-file voices attacked as disloyal those progressives who raised questions. That told Obama he faces few consequences -- and even defense -- from his own base for promoting those who engineered the economic meltdown.
The only open question is whether the public at large becomes complicit, too. Come Election Day, if there are no consequences at the ballot box for the politicians -- Democrat or Republican -- who legislated bailouts, supported these appointments, and are now working to undermine proposed Wall Street reforms, then America will have created the biggest moral hazard of all.
© 2009 Creators Syndicate Inc.
Just in time for President Obama's jobs summit, Reuters columnist James Pethoukoukis gives us a glimpse at Goldman Sachs' economic outlook, compiled by ace forecaster Jan Hatzius. (Found via Calculated Risk.)
The key line:
...(2) a peaking in unemployment in mid-2011 at about 10 3/4 percent.
The unemployment rate sits at 10.2 percent right now. The prospect that it might remain above 10 percent for another year and a half is, as Pethokoukis rightly points out, a massive political disaster in the making for Democrats.
Other forecasts have predicted that unemployment would peak in the first quarter of 2010 and then start to slowly fall, but an article published today in Bloomberg News ranks Hatzius as the most accurate economic forecaster on Wall Street, so his doom-and-gloom cannot lightly be ignored.
On a happier note, there appears to be real momentum on the weekly jobless claims front, with new filings for benefits falling for the fifth straight week to the lowest point in more than a year, and with the four-week moving average dropping like a rock. But that's a slender thread upon which to hang, when faced with the scenario foretold by Hatzius.
How tough is it to be a Goldman Sachs banker these days? Despite the record-breaking profits and unprecedented employee compensation, we learn from Bethany McLean's lengthy profile of the company in Vanity Fair that "there is an embattled feeling about the place," according to one person "who knows the firm well."
How embattled? Bloomberg columnist Alice Shroeder passes on some hearsay: Goldman bankers are stocking up on ammo!
"I just wrote my first reference for a gun permit," said a friend, who told me of swearing to the good character of a Goldman Sachs Group Inc. banker who applied to the local police for a permit to buy a pistol. The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank.
The "senior Goldman people" may be spending too much time trolling the Internet. If you read the comments posted after just about any blog item or feature article referencing Goldman, the venom expressed would surely lead you to imagine that a mob armed with pitchforks and torches was already on their way to Goldman headquarters. It's a bipartisan frenzy, and as Goldman profits continue to accumulate while the economic slump persists, the bile will continue to percolate.
But spare us the "embattlement" syndrome. A foreclosure notice or a pink slip engenders a siege mentality for good reason. Bad press, when you are making as much money as Goldman employees do, is collateral damage that hardly nicks the paint job on a Bentley.
One out of four homeowners is now under water, owing more on their homes than the homes are worth. Why? The biggest single factor behind the housing crisis is rising unemployment. According to the latest ABC-Washington Post poll, one out of every three Americans has either lost their job or lives in a household with someone who has lost a job. Today it takes two and sometimes three incomes to buy the groceries and pay the mortgage or the rent. So if one of those incomes is gone, a homeowner can't make the payment.
The scourge of unemployment is splitting America into three groups: 1) the third just mentioned, whose households are in danger of losing their homes and whose kids are surviving on food stamps (that's up to one in four children in America today); 2) the vast majority of Americans who are managing but worried about keeping their jobs and homes; and 3) a small number who are taking home even more winnings than they did in the boom year 2007.
Prominent among Category 3 are Wall Street bankers, many of whom are now concluding their most profitable year ever. Goldman Sachs is so flush it's preparing to give out bonuses in a few weeks totaling $17 billion. That will mean eight-figure compensation packages for lots of Goldman executives and traders. JPMorgan Chase is rumored to have a bonus pool of around $5 billion. The three other major Wall Street banks are ratcheting up their compensation packages so their "talent" won't be poached by Goldman or JPMorgan.
Wall Street is booming again in large part because the rest of America -- categories 1 and 2, above -- bailed it out to the tune of $700 billion last year. The Street has repaid some of that but, according to the bailout program's inspector general, much of it is gone forever. For example, the taxpayer money that bailed out giant insurer AIG went directly through AIG to its "counterparties" like Goldman Sachs -- to whom Tim Geithner, according to the inspector general, gave away the store. As Goldman Sachs prepares to dole out some $17 billion to its executives and traders, it's worth noting that Goldman received $13 billion a year ago from the rest of us via AIG and Geithner, no strings attached.
Which brings us back to homeowners who are falling further behind. The $75 billion federal program designed to bribe banks to modify mortgages has been a bust. No one knows the exact number of mortgages that have been modified (that will be reported next month) but housing experts I've talked with say it's a tiny fraction of the number of homeowners in trouble. Seems that the big banks can't be bothered. "Some of the firms ought to be embarrassed," Michael Barr, the assistant Treasury secretary for financial institutions, told the New York Times.
Barr says the government will try to use shame as a corrective, publicly naming institutions that have moved too slowly. But the banks have done almost nothing to date. "We've made dramatic improvements, and we continue to try to get better," says a spokesman for JPMorgan Chase, but as a practical matter JPMorgan has done squat.
Shame? If we've learned anything over the last year, it's that Wall Street has none. Ten months ago Wall Street lobbyists beat back a proposal to give bankruptcy judges the right to amend mortgages in order to pressure lenders to reduce principle owed, just like Wall Street lobbyists are now beating back tough regulations to prevent the Street from causing another meltdown.
Shame? For Wall Street, it all comes down to P.R., at minimal cost. Goldman Sachs, attempting to preempt a firestorm of public outrage when it dispenses its $17 billion of bonuses, is setting up a crudely conceived $500 million P.R. program to help Main Street.
Shame won't work. Only political muscle and courage will. Congress and the Obama administration should give homeowners the right to go to a bankruptcy judge and have their mortgages modified.
And while they're at it, resurrect the Glass-Steagall Act that used to separate investment from commercial banking, so Wall Street can't continue to use other people's money to gamble.
Finally, before Goldman hands out $17 billion in bonuses, claw back the $13 billion Goldman took from AIG and the rest of us and add it to the pool of money going for mortgage relief.
